StockBeat: HSBC Gets Ready to Shrink; LVMH Eyes a Tiffany Bargain


By Geoffrey Smith — HSBC Holdings (LON:HSBA) shares fell to the bottom of the FTSE 100 Monday after a dire third-quarter earnings report at Europe’s largest bank shed more light on its strategic problems – and prepared investors for major job cuts and restructuring charges in the months ahead.

Net profit fell 24% and revenue fell 3% on the year in the three months to September, prompting interim CEO Noel Quinn to abandon the bank’s profitability target for next year, although he stopped short of cutting the dividend and said the targeted common equity tier 1 capital ratio – a key measure of financial strength – will remain unchanged at over 14%.

The bank’s problems were already well flagged by the unscheduled departure of John Flint as CEO earlier this year, followed by unconfirmed reports four weeks ago of plans to cut up to 10,000 jobs. The areas highlighted by Quinn in the earnings release are exactly those mentioned in the earlier reports: the U.S. operations, the wholesale banking operation in the U.K. and the retail operations in continental Europe.

“Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth,” Quinn said. “We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities.”

The bank now expects “substantial” restructuring charges that will stop it reaching its target of a return on tangible equity of 11% next year. A weak third quarter means that RoTE has dropped to 9.5% for the first nine months of this year. Talking to Bloomberg later, chief financial officer Ewen Stevenson declined to say how long it would take to hit the 11% mark.

The shares lost 3.4% to their lowest in nearly two months, dragging the U.K. FTSE down 0.3% by 4:00 AM ET (0900 GMT). The Euro Stoxx 600 was down 0.2%, while a strong performance from the auto sector allowed the German DAX to inch fractionally higher.

Elsewhere, French luxury goods giant LVMH (PA:LVMH) rose 0.4% after confirming that it had made an approach to Tiffany & Co (NYSE:TIF), a move that would bulk up its presence in “hard luxury” and also strengthen its footprint in the U.S. The Financial Times reported that Tiffany was expected to reject the unsolicited $14.5 billion bid, which was around 30% above the jeweler’s share price when it was made earlier in October. Even at that price, though, it represents a much lower earnings multiple than what LVMH paid for Bulgari in its first foray into jewelry seven years ago.

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